International trade vs internal trade, International Economics Assignment Help

The factors that distinguish international trade from internal or domestic or intra-country trade are briefly discussed below.

1. Barriers to Factor Mobility between the Nations

A very important factor that distinguishes international trade from internal trade is the immobility off actors between the nations Factors of production enjoy unre­stricted and free mobility within the boundaries of a nation. For example, marwaris (traditionally a business community) from western India can freely move to West Bengal and to far east to carry out trade and business; people can freely move from Uttar Pradesh to Mumbai (Bombay) to work as cotton textile labour or to set up a paan-shop or a dairy (tabela); and unemployed labour of Bihar can freely move to Punjab to work as farm labour. Perfect mobility of factors ensures efficient divi­sion of labour between different industries, trade and occupations. It brings also balance between different regions of the country. though not necessarily- inter regional disparities in India have grown over the past five decades. In contrast, factors of production are not perfectly or freely mobile between the nations. Labour and capital cannot freely move from one country to another. As we will see be­low, the classical theories of international trade are, in fact, based on the assump­tion that 'factors are immobile between the nations'. There are a number of bar­riers to free flow of labour and capital between the nations. The barriers to inter­national factor-mobility are discussed below.

(a) Geographical distance. Excepting in case of neighbouring countries, geo­graphical distance involves transportation problem. It involves often a prohibitive cost of transportation. A Nepali or Bangladeshi labour may not find it difficult to migrate to India and find a job here. But, for an Indian labour, it costs heavily to migrate Australia, United States and Canada and find a suitable job. Transporta­tion cost is prohibitive unless it is borne by the employer country.

(b) Restrictive immigration laws. Apart from geographical distance and trans­portation cost, no country allows free inflow and outflow of labour. The objective of restricting in-migration is to protect the domestic labour market from the invasion of foreign labour. And, the objective of restricting out-flow of labour is to prevent brain drain, i.e., out-flow of educated, trained and skilled manpower.

(c) Different tax systems. An unfriendly tax system restricts the international flow of both labour and capital, particularly the latter. One instance may be of particular importance in this regard. Saudi Arabia imposed income tax for the first time in the late 1980s. The European skilled manpower and professionals who had joined Saudi labour market considering Saudi Arabia a tax-free heaven resigned their job en masse after the imposition of30 per cent income tax. Since this loss of skilled manpower was not in the interest of the country, the Saudi government withdrew its tax scheme within a month of its imposition. High corporate income tax (55 per cent) in India prior to the 1991-tax reforms had prevented foreign investment in the country despite its desirability. Foreign investors were highly critical of tax system in India.

(d) Different language, laws, culture, social customs and traditions. People prefer to work in a familiar environment, with people speaking the same language, sharing the same customs, traditions, religion and festivals, and within an acces­sible distance from their family. Since countries differ in respect of all these fac­tors, labour movement between 'the countries is not free. These factors reduce mobility of labour within the different regions of the country.

(e) Different education systems and levels of skills. Movement of labour is restricted also by the different education system and the levels of skills. For in­stance, medical education systemajrthe member countries of the erstwhile Soviet Union is not recognized in India So medical manpower cannot freely migrate to India even if other legal restrictions are not there. The technological differences between the nations make even the skilled manpower of one country irrelevant for other countries. For instance, Indian railway drivers are of no use in Japanese rail­way system-it will require further training.

(f) Different political and economic systems and policies. Prior to the glasnost in the Russia and economic reforms in the early 1990s, the world was divided broadly in three blocks, viz., capitalist block, socialist block and the 'third world' In and outflow of capital and labour was highly restricted between the blocks, especially between the capitalist and the socialist blocks. This was so, in fact, both a by-product of their different political and economic systems and a matter of policy. The barriers born out of the differences in political and economic systems are being gradually reduced, but they do exist.

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